Question

Quisco Systems has 6.3 billion shares outstanding and a share price of $18.69.Quisco is considering developing a new networking product in house at a cost of $ 547million.​ Alternatively, Quisco can acquire a firm that already has the technology for $ 975 million worth​ (at the current​ price) of Quisco stock. Suppose that absent the expense of the new​ technology, Quisco will have EPS of$ 0.82

a. Suppose Quisco develops the product in house. What impact would the development cost have on​ Quisco's EPS? Assume all costs are incurred this year and are treated as an​ R&D expense,​ Quisco's tax rate is 35%​, and the number of shares outstanding is unchanged.

b. Suppose Quisco does not develop the product in house but instead acquires the technology. What effect would the acquisition have on​ Quisco's EPS this​ year? (Note that acquisition expenses do not appear directly on the income statement.

Assume the firm was acquired at the start of the year and has no revenues or expenses of its​ own, so that the only effect on EPS is due to the change in the number of shares​ outstanding.)

c. Which method of acquiring the technology has a smaller impact on​ earnings? Is this method​ cheaper? Explain.

Answer 1

Solution:-

A. Suppose Quisco develops the product in house. What impact would the development cost have on​ Quisco's EPS-

Assume New project does not changes its that year revenue.

Earning of Quisco is fall by $547 Million (1-0.35) = $355.55 Million

EPS Fall by=

EPS Fall by=

EPS Fall by = $0.056

Now EPS will be $0.82 - $0.056 = $0.76

B. Suppose Quisco does not develop the product in house but instead acquires the technology. What effect would the acquisition have on​ Quisco's EPS this​ year-

New Shares issued it technology acquired =

New Shares issued it technology acquired =

New Shares issued it technology acquired = 52.17 Million shares

Earning without transaction is = $0.82 * 6.30 Billion shares

Earning without transaction is = $5.166 Billion

EPS =

EPS = $0.81

C. EPS of Acquiring Technology is higher than EPS of Develop products in house. Acquiring technology has smaller impact on EPS than Develop product in house. Develop in house is less costly than acquiring technology and will get immediate tax benefit. Acquiring new technology would always increase the number of share oustanding and reduce EPS in future aswell.

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